UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2001
[ ] TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transaction period from __________ to __________
Commission File Number: 0-22140
FIRST MIDWEST FINANCIAL, INC.
(Exact name of registrant as specified in its charter)
Delaware 42-1406262
-------- ----------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
Fifth at Erie, Storm Lake, Iowa 50588
-------------------------------------
(Address of principal executive offices)
(712) 732-4117
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class: Outstanding at February 12, 2002:
Common Stock, $.01 par value 2,459,912 Common Shares
Transitional Small Business Disclosure Format: Yes [ ]; No [X]
FIRST MIDWEST FINANCIAL, INC.
FORM 10-Q
INDEX
Page No.
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Part I. Financial Information
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Item 1. Financial Statements (unaudited):
Consolidated Balance Sheets
at December 31, 2001 and September 30, 2001 3
Consolidated Statements of Income for the
Three Months Ended December 31, 2001 and 2000 4
Consolidated Statements of Comprehensive Income (Loss)
for the Three Months Ended December 31, 2001 and 2000 5
Consolidated Statement of Changes in Shareholders'
Equity for the Three Months Ended December 31, 2001 6
Consolidated Statements of Cash Flows for the
Three Months Ended December 31, 2001 and 2000 7
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosure About Market Risk 18
Part II. Other Information 20
- ---------------------------
Signatures 21
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2
Part I. Financial Information
Item I. Financial Statements
FIRST MIDWEST FINANCIAL, INC.
AND SUBSIDIARIES
Consolidated Balance Sheets (Unaudited)
December 31, 2001 September 30, 2001
----------------- ------------------
Assets
Cash and due from banks $ 1,314,920 $ 1,016,111
Interest-bearing deposits in other financial institutions -
short-term (cost approximates market value) 6,297,513 7,750,194
------------- -------------
Total cash and cash equivalents 7,612,433 8,766,305
Securities available for sale, amortized cost
of $161,187,183 at December 31, 2001 and
$144,836,919 at September 30, 2001 160,676,665 145,374,339
Loans receivable - net of allowance for loan losses
of $4,144,719 at December 31, 2001 and $3,868,664
at September 30, 2001 345,942,074 333,062,025
Foreclosed real estate, net 979,753 940,143
Accrued interest receivable 4,306,283 4,750,792
Federal Home Loan Bank stock, at cost 6,937,600 6,398,900
Premises and equipment, net 9,457,460 9,346,788
Excess of cost over net assets acquired 3,403,019 3,403,019
Other assets 11,596,523 11,140,752
------------- -------------
Total Assets $ 550,911,810 $ 523,183,063
============= =============
Liabilities and Shareholders' Equity
Liabilities
Deposits $ 342,957,168 $ 338,781,878
Advances from Federal Home Loan Bank 124,067,057 126,351,761
Securities sold under agreements to repurchase 28,392,720 1,992,720
Company Obligated Mandatorily Redeemable Preferred
Securities of Subsidiary Trust Holding Solely
Subordinated Debentures 10,000,000 10,000,000
Advances from borrowers for taxes and insurance 321,246 446,397
Accrued interest payable 663,107 868,281
Other liabilities 1,410,135 1,014,816
------------- -------------
Total Liabilities 507,811,433 479,455,853
------------- -------------
Shareholders' Equity
Preferred stock, 800,000 shares authorized, no shares
issued or outstanding -- --
Common stock, $.01 par value, 5,200,000 shares authorized,
2,957,999 shares issued and 2,459,912 shares outstanding
at December 31, 2001; 2,957,999 shares issued and
2,469,727 shares outstanding at September 30, 2001 29,580 29,580
Additional paid-in capital 20,863,363 20,863,379
Retained earnings - substantially restricted 31,183,640 31,066,643
Accumulated other comprehensive income (loss) (321,811) 338,427
Unearned Employee Stock Ownership Plan shares (135,000) (180,000)
Treasury stock, 498,087 and 488,272 common shares, at cost,
at December 31, 2001 and September 30, 2001, respectively (8,519,395) (8,390,819)
------------- -------------
Total Shareholders' Equity 43,100,377 43,727,210
------------- -------------
Total Liabilities and Shareholders' Equity $ 550,911,810 $ 523,183,063
============= =============
The accompanying notes are an integral part of these consolidated financial
statements.
3
FIRST MIDWEST FINANCIAL, INC.
AND SUBSIDIARIES
Consolidated Statements of Income (Unaudited)
Three Months Ended
December 31,
2001 2000
----------- -----------
Interest and Dividend Income:
Loans receivable, including fees $ 6,794,813 $ 7,081,316
Securities available for sale 2,334,250 2,652,541
Dividends on Federal Home Loan Bank stock 70,222 148,204
----------- -----------
Total interest and dividend income 9,199,285 9,882,061
Interest Expense:
Deposits 3,804,005 4,520,175
FHLB advances and other borrowings 2,124,030 2,024,877
----------- -----------
Total interest expense 5,928,035 6,545,052
----------- -----------
Net interest income 3,271,250 3,337,009
Provision for loan losses 299,000 150,000
----------- -----------
Net interest income after provision for loan losses 2,972,250 3,187,009
Noninterest income:
Deposit service charges and other fees 296,152 227,645
Gain (loss) on sales of securities available for sale, net 6,879 --
Gain (loss) on sales of foreclosed real estate, net (1,704) (457)
Brokerage commissions 75,655 27,863
Other income 192,696 32,828
----------- -----------
Total noninterest income 569,678 287,879
Noninterest expense:
Employee compensation and benefits 1,851,407 1,550,573
Occupancy and equipment expense 454,466 346,772
Federal deposit insurance premium 15,781 15,964
Data processing expense 139,745 88,721
Other expense 474,846 473,989
----------- -----------
Total noninterest expense 2,936,245 2,476,019
----------- -----------
Income before income taxes 605,683 998,869
Income tax expense 168,898 392,563
----------- -----------
Net income $ 436,785 $ 606,306
=========== ===========
Earnings per common share:
Basic $ 0.18 $ 0.25
----------- -----------
Diluted $ 0.18 $ 0.25
----------- -----------
The accompanying notes are an integral part of these consolidated financial
statements.
4
FIRST MIDWEST FINANCIAL, INC.
AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income (Loss) (Unaudited)
Three Months Ended
December 31,
2001 2000
----------- -----------
Net income $ 436,785 $ 606,306
Other comprehensive income (loss):
Net change in net unrealized gains and losses on
securities available for sale (1,047,938) $ 1,759,169
Deferred income tax expense (benefit) (387,700) 654,633
----------- -----------
Total other comprehensive income (loss) (660,238) 1,104,536
----------- -----------
Total comprehensive income (loss) $ (223,453) $ 1,710,842
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
5
FIRST MIDWEST FINANCIAL, INC.
AND SUBSIDIARIES
Consolidated Statement of Changes in Shareholders' Equity (Unaudited)
For the Three Months Ended December 31, 2001
Accumulated
Other
Additional Comprehensive
Common Paid-In Retained Income (Loss),
Stock Capital Earnings Net of Tax
--------- ------------ ------------ -----------
Balance at September 30, 2001 $ 29,580 $ 20,863,379 $ 31,066,643 $ 338,427
Cash dividends declared on common
stock ($0.13 per share) -- -- (319,788) --
Purchase of 12,315 common shares of
treasury stock -- -- -- --
3,750 common shares committed to be
released under the ESOP -- 5,015 -- --
Issuance of 2,500 common shares from
treasury stock due to exercise of stock
options -- (5,031) -- --
Net change in net unrealized losses on
securities available for sale, net of
effect of income taxes of $(387,700) -- -- -- (660,238)
Net income for the three months ended
December 31, 2001 -- -- 436,785 --
--------- ------------ ------------ -----------
Balance at December 31, 2001 $ 29,580 $ 20,863,363 $ 31,183,640 $ (321,811)
========= ============ ============ ===========
Unearned
Employee
Stock Total
Ownership Treasury Shareholders'
Plan Shares Stock Equity
----------- ------------ ------------
Balance at September 30, 2001 $ (180,000) $ (8,390,819) $ 43,727,210
Cash dividends declared on common
stock ($0.13 per share) -- -- (319,788)
Purchase of 12,315 common shares of
treasury stock -- (161,326) (161,326)
3,750 common shares committed to be
released under the ESOP 45,000 -- 50,015
Issuance of 2,500 common shares from
treasury stock due to exercise of stock
options -- 32,750 27,719
Net change in net unrealized losses on
securities available for sale, net of
effect of income taxes of $(387,700) -- -- (660,238)
Net income for the three months ended
December 31, 2001 -- -- 436,785
----------- ------------ ------------
Balance at December 31, 2001 $ (135,000) $ (8,519,395) $ 43,100,377
=========== ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
6
FIRST MIDWEST FINANCIAL, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
Three Months Ended December 31,
2001 2000
------------ ------------
Cash flows from operating activities:
Net income $ 436,785 $ 606,306
Adjustments to reconcile net income to net cash from operating activities:
Depreciation, amoritization and accretion, net 441,097 235,182
Provision for loan losses 299,000 150,000
(Gain) loss on sales of foreclosed real estate, net 1,704 457
(Gain) loss on sales of securities available for sale (6,879) --
Proceeds from sales of loans held for sale 8,982,122 1,501,909
Originations of loans held for sale (8,982,122) (1,501,909)
Net change in accrued interest receivable 444,509 40,936
Net change in other assets 161,160 425,758
Net change in accrued interest payable (205,174) 32,223
Net change in accrued expenses and other liabilities 166,087 (466,791)
------------ ------------
Net cash from operating activities 1,738,289 1,024,071
Cash flows from investing activities:
Purchase of securities available for sale (27,091,067) --
Proceeds from maturities and principal repayments of
securities available for sale 10,532,068 2,783,343
Net change in loans receivable (6,696,745) 6,911,142
Loans purchased (6,566,454) (2,801,910)
Proceeds from sales of foreclosed real estate 53,146 404,596
Purchase of FHLB stock (538,700) --
Purchase of premises and equipment, net (296,450) (592,722)
------------ ------------
Net cash from investing activities (30,604,202) 6,704,449
Cash flows from financing activities:
Net change in noninterest-bearing demand, savings, NOW, and
money market demand deposits 6,770,290 5,119,950
Net change in other time deposits (2,594,999) 10,205,475
Proceeds from advances from Federal Home Loan Bank 84,650,000 47,215,000
Repayments of advances from Federal Home Loan Bank (86,934,704) (63,569,952)
Proceeds from other borrowings 88,900,000 --
Repayments of other borrowings (62,800,000) --
Net change in securities sold under agreements to repurchase 300,000 (916,601)
Net change in advances from borrowers for taxes and insurance (125,151) 59,208
Cash dividends paid (319,788) (315,865)
Proceeds from the exercise of stock options 27,719 --
Purchase of treasury stock (161,326) (17,778)
------------ ------------
Net cash from financing activities 27,712,041 (2,220,563)
------------ ------------
Net change in cash and cash equivalents (1,153,872) 5,507,957
Cash and cash equivalents at beginning of period 8,766,305 6,922,531
------------ ------------
Cash and cash equivalents at end of period $ 7,612,433 $ 12,430,488
============ ============
Supplemental disclosure of cash flow information
Cash paid during the period for:
Interest $ 6,133,209 $ 6,512,829
Income taxes 9,200 9,500
Supplemental schedule of non-cash investing and financing activities:
Loans transferred to foreclosed real estate $ 94,459 $ 34,000
The accompanying notes are an integral part of these consolidated financial
statements.
7
FIRST MIDWEST FINANCIAL, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting policies followed by First Midwest Financial, Inc. ("First
Midwest" or the "Company") and its consolidated subsidiaries, First Federal
Savings Bank of the Midwest ("First Federal"), Security State Bank
("Security"), First Services Financial Limited and Brookings Service
Corporation, for interim reporting are consistent with the accounting
policies followed for annual financial reporting. All adjustments that, in
the opinion of management, are necessary for a fair presentation of the
results for the periods reported have been included in the accompanying
unaudited consolidated financial statements, and all such adjustments are
of a normal recurring nature. The accompanying financial statements do not
purport to contain all the necessary financial disclosures required by
generally accepted accounting principles that might otherwise be necessary
in the circumstances and should be read in conjunction with the Company's
consolidated financial statements, and notes thereto, for the year ended
September 30, 2001.
2. EARNINGS PER SHARE
Basic earnings per share is based on net income divided by the weighted
average number of shares outstanding during the period. Diluted earnings
per share shows the dilutive effect of additional common shares issuable
under stock options.
A reconciliation of the numerators and denominators used in the basic
earnings per common share and the diluted earnings per common share
computations for the three months ended December 31, 2001 and 2000 is
presented below.
Three Months Ended
December 31,
------------
2001 2000
---- ----
Basic Earnings Per Common Share:
Numerator:
Net Income $ 436,785 $ 606,306
=========== ===========
Denominator:
Weighted average common
shares outstanding 2,466,639 2,429,727
Less: Weighted average
unallocated ESOP shares (13,750) --
----------- -----------
Weighted average common shares
outstanding for basic earnings
per share 2,452,889 2,429,727
=========== ===========
Basic earnings per common share $ 0.18 $ 0.25
=========== ===========
8
Three Months Ended
December 31,
2000 1999
---- ----
Diluted Earnings Per Common Share:
Numerator:
Net Income $ 436,785 $ 606,306
========== ==========
Denominator:
Weighted average common
shares outstanding for basic
earnings per common share 2,452,889 2,429,727
Add: Dilutive effects of assumed
exercise of stock options, net
of tax benefits 39,331 28,006
---------- ----------
Weighted average common and
dilutive potential common
shares outstanding 2,492,220 2,457,733
========== ==========
Diluted earnings per common share $ 0.18 $ 0.25
========== ==========
3. COMMITMENTS
At December 31, 2001 and September 30, 2001, the Company had outstanding
commitments to originate and purchase loans totaling $24.2 million and
$29.7 million, respectively, excluding undisbursed portions of loans in
process. It is expected that outstanding loan commitments will be funded
with existing liquid assets.
4. INTANGIBLE ASSETS
On October 1, 2001, the Company elected early adoption of Statement of
Financial Accounting Standards No. 141, "Business Combinations," and No.
142, "Goodwill and Other Intangible Assets" (SFAS 141 and 142). SFAS 141
addresses financial accounting and reporting for business combinations and
replaces APB Opinion No. 16, "Business Combinations" (APB 16). SFAS 141 no
longer allows the pooling of interests method of accounting for
acquisitions, provides new recognition criteria for intangible assets and
carries forward without reconsideration the guidance in APB 16 related to
the application of the purchase method of accounting. SFAS 142 addresses
financial accounting and reporting for acquired goodwill and other
intangible assets and replaces APB Opinion No. 17, "Intangible Assets."
SFAS 142 addresses how intangible assets should be accounted for upon their
acquisition and after they have been initially recognized in the financial
statements. The new standards provide specific guidance on measuring
goodwill for impairment annually using a two-step process. The first step
identifies potential impairment and the second step measures the amount of
goodwill impairment loss to be recognized.
As of October 1, 2001, the Company has undertaken to identify those
intangible assets that remain separable under the provisions of the new
standard and those that are to be included in goodwill and has concluded
that all amounts should be included in goodwill. In the year of adoption,
SFAS 142 requires the first step of the goodwill impairment test to be
completed within the first six months and the final step to be completed
within twelve months of adoption. The Company has not completed the first
step of the goodwill impairment test, but will perform the test during the
second quarter of fiscal 2001.
9
Had the provisions of SFAS 141 and 142 been applied in fiscal year 2001,
the Company's net income and net income per share would have been as
follows:
3 Months ended
December 31, 2000
-----------------
Basic Diluted
Net earnings earnings
Income Per Share Per share
-------- --------- ---------
Net Income:
As reported $606,306 $ .25 $ .25
Add: Goodwill amortization 92,187 .04 .03
-------- ------- -------
Pro forma net income $698,493 $ .29 $ .28
======== ======= =======
As of September 30, 2001 and December 31, 2001 the Company had intangible
assets of $3,403,019, all of which has been determined to be goodwill.
There was no goodwill impairment loss or amortization related to goodwill
during the three months ended December 31, 2001.
10
Part I. Financial Information
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
FIRST MIDWEST FINANCIAL, INC.
AND SUBSIDIARIES
GENERAL
First Midwest Financial, Inc. ("First Midwest" or the "Company") is a bank
holding company whose primary assets are First Federal Savings Bank of the
Midwest ("First Federal") and Security State Bank ("Security"). The Company was
incorporated in 1993 as a unitary non-diversified savings and loan holding
company and, on September 20, 1993, acquired all of the capital stock of First
Federal in connection with First Federal's conversion from mutual to stock form
of ownership. On September 30, 1996, the Company became a bank holding company
in conjunction with the acquisition of Security.
The following discussion focuses on the consolidated financial condition of the
Company and its subsidiaries, at December 31, 2001, compared to September 30,
2001, and the consolidated results of operations for the three months ended
December 31, 2001, compared to the same period in 2000. This discussion should
be read in conjunction with the Company's consolidated financial statements, and
notes thereto, for the year ended September 30, 2001.
FINANCIAL CONDITION
Total assets increased by $27.7 million, or 5.3%, to $550.9 million at December
31, 2001, from $523.2 million at September 30, 2001.
The portfolio of securities available for sale increased $15.3 million, or
10.5%, to $160.7 million at December 31, 2001, from $145.4 million at September
30, 2001. The increase resulted from the purchase of securities available for
sale in an amount greater than maturities and principal repayments received
during the period.
The portfolio of net loans receivable increased by $12.8 million, or 3.8%, to
$345.9 million at December 31, 2001, from $333.1 million at September 30, 2001.
The increase was due to increases in commercial and multi-family real estate
loans and commercial business loans, which were partially offset by decreases in
single-family residential mortgage loans, consumer loans and agricultural loans.
Deposit balances increased by $4.2 million, or 1.2%, to $343.0 million at
December 31, 2001, from $338.8 million at September 30, 2001. The increase in
deposit balances resulted from increases in checking accounts, money market
demand accounts, and savings accounts in the amounts of $4.3 million, $772,000,
and $1.7 million, respectively. These increases were partially offset by a $2.6
million decrease in certificates of deposit.
The balance in advances from the Federal Home Loan Bank of Des Moines (FHLB)
decreased by $2.3 million, or 1.8%, to $124.1 million at December 31, 2001 from
$126.4 million at September 30, 2001. In addition, the balance in securities
sold under agreements to repurchase increased by $26.4 million to $28.4 million
at December 31, 2001 from $2.0 million at September 30, 2001. The increase in
securities sold under agreements to repurchase reflects the use of alternative
borrowing sources at comparatively lower costs to fund balance sheet growth
during the quarter.
11
Total shareholders' equity decreased $627,000, or 1.4%, to $43.1 million at
December 31, 2001 from $43.7 million at September 30, 2001. The decrease in
shareholders' equity during the period was due primarily to an increase in the
unrealized loss on securities available for sale in accordance with SFAS 115.
NON-PERFORMING ASSETS AND ALLOWANCE FOR LOAN LOSSES
Generally, when a loan becomes delinquent 90 days or more, or when the
collection of principal or interest becomes doubtful, the Company will place the
loan on non-accrual status and, as a result of this action, previously accrued
interest income on the loan is taken out of current income. The loan will remain
on non-accrual status until the loan has been brought current, or until other
circumstances occur that provide adequate assurance of full repayment of
interest and principal.
At December 31, 2001, the Company had loans delinquent 30 days and over totaling
$14.3 million, or 4.1% of total loans compared to $15.1 million, or 4.5% of
total loans at September 30, 2001.
At December 31, 2001, commercial and multi-family real estate loans delinquent
30 days and over totaled $10.7 million, or 3.1% of the total loan portfolio as
compared to $11.3 million, or 3.4% of total loans at September 30, 2001.
Multi-family and commercial real estate loans generally present a higher level
of risk than loans secured by one- to four-family residences. This greater risk
is due to several factors, including the concentration of principal in a limited
number of loans and borrowers, the effect of general economic conditions on
income producing properties and the increased difficulty of evaluating and
monitoring these types of loans. The majority of the Company's delinquent
commercial and multi-family real estate loans have been purchased as
participations with other lenders, are serviced by other lenders and are secured
by properties outside the Company's primary market area. These loans are being
closely monitored by management, however, there can be no assurance that all
loans will be fully collectible.
At December 31, 2001, agricultural operating loans delinquent 30 days and over
totaled $1.5 million, or 0.43% of the total loan portfolio as compared to $1.6
million, or 0.48% of total loans at September 30, 2001. Agricultural lending
involves a greater degree of risk than one- to four-family residential mortgage
loans because of the typically larger loan amounts. In addition, payments on
loans are dependent on the successful operation or management of the farm
property securing the loan or for which an operating loan is utilized. The
success of the loan may also be affected by factors outside the control of the
agricultural borrower, such as the weather and grain and livestock prices.
Although management believes the Company's portfolio of agricultural real estate
and operating loans is well structured and adequately secured, there can be no
assurance that all loans will be fully collectible.
The table below sets forth the amounts and categories of non-performing assets
in the Company's loan portfolio. The Company's restructured loans (which
involved forgiving a portion of the interest or principal on the loan or making
loans at a rate materially less than market rates) are included in the table and
were performing as agreed at the date shown. Foreclosed assets include assets
acquired in settlement of loans.
December 31, 2001 September 30, 2001
----------------- ------------------
(Dollars in Thousands)
Non-accruing loans:
One-to four family $ 154 $ 168
Commercial and multi-family 4,926 464
Agricultural real estate -- --
Consumer 64 33
Agricultural operating 677 569
Commercial business 539 369
------ ------
Total non-accruing loans 6,360 1,603
Accruing loans delinquent 90 days or more -- --
------ ------
Total non-performing loans 6,360 1,603
------ ------
Restructured loans:
Consumer 10 10
Agricultural operating 14 14
Commercial business -- --
------ ------
Total restructured loans 24 24
------ ------
Foreclosed assets:
Commercial real estate 931 889
Consumer 49 51
------ ------
Total foreclosed assets 980 940
Less: Allowance for losses -- --
------ ------
Total foreclosed assets, net 980 940
------ ------
Total non-performing assets $7,364 $2,567
====== ======
Total as a percentage of total assets 1.34% 0.49%
====== ======
The increase in non-accruing loans at December 31, 2001 as compared to September
30, 2001 was primarily due to the transfer of a $4.5 million commercial real
estate participation loan secured by a hotel to non-accrual status.
Classified Assets. Federal regulations provide for the classification of loans
and other assets as "substandard", "doubtful" or "loss", based on the level of
weakness determined to be inherent in the collection of the principal and
interest. When loans are classified as either substandard or doubtful, the
Company may establish general allowances for loan losses in an amount deemed
prudent by management. General allowances represent loss allowances which have
been established to recognize the inherent risk associated with lending
activities, but which, unlike specific allowances, have not been allocated to
particular problem loans. When assets are classified as loss, the Company is
required either to establish a specific allowance for loan losses equal to 100%
of that portion of the loan so classified, or to charge-off such amount. The
Company's determination as to the classification of its loans and the amount of
its valuation allowances are subject to review by its regulatory authorities,
whom may require the establishment of additional general or specific loss
allowances.
On the basis of management's review of its loans and other assets, at December
31, 2001, the Company had classified a total of $13.8 million of its assets as
substandard, $181,000 as doubtful and none as loss as compared to
classifications at September 30, 2001 of $7.2 million substandard, $49,000
doubtful and none as loss.
Allowance for Loan Losses. The Company establishes its provision for loan
losses, and evaluates the adequacy of its allowance for loan losses based upon a
systematic methodology consisting of a number of
13
factors including, among others, historic loss experience, the overall level of
non-performing loans, the composition of its loan portfolio and the general
economic environment within which the Bank and its borrowers operate.
Current economic conditions in the agricultural sector of the Company's market
area indicate potential weakness due to low commodity prices. Price levels for
grain crops have generally been depressed since mid-1998 and currently remain at
historically low levels. Grain crop prices are not expected to increase
significantly in the near term. Livestock prices have improved and are currently
at levels that present minimal concern. The agricultural economy is accustomed
to commodity price fluctuations and is generally able to handle such
fluctuations without significant problem. Although the Company underwrites its
agricultural loans based on the current level of commodity prices, an extended
period of low commodity prices or adverse growing conditions could result in
weakness in the agricultural loan portfolio and could create a need for the
Company to increase its allowance for loan losses through increased charges to
the provision for loan losses.
At December 31, 2001, the Company has established an allowance for loan losses
totaling $4.1 million. The allowance represents approximately 65% of the total
non-performing loans at December 31, 2001 as compared to approximately 240% of
the total non-performing loans at September 30, 2001.
The following table sets forth an analysis of the activity in the Company's
allowance for loan losses for the three-month periods ended December 31, 2001
and December 31, 2000:
2001 2000
---- ----
(In Thousands)
Balance, September 30, $ 3,869 $ 3,590
Charge-offs (39) (33)
Recoveries 16 26
Additions charged to operations 299 150
------- -------
Balance, December 31, $ 4,145 $ 3,733
======= =======
The allowance for loan losses reflects management's best estimate of probable
losses inherent in the portfolio based on currently available information.
Future additions to the allowance for loan losses may become necessary based
upon changing economic conditions, increased loan balances or changes in the
underlying collateral of the loan portfolio.
RESULTS OF OPERATIONS
General. For the three months ended December 31, 2001, the Company recorded net
income of $437,000 compared to net income of $606,000 for the same period in
2000. The decline in net income was the result of a reduction in net interest
income due to a narrowing of the net interest margin and, in addition, was due
to an increase in noninterest expense resulting from start-up costs associated
with the opening of two new offices.
Net income for the three months ended December 31, 2001 was positively impacted
by the adoption of Statement of Financial Accounting Standards No. 141 and 142
(SFAS 141 and 142) related to business combinations, goodwill and other
intangible assets. The adoption of SFAS 141 and 142 on October 1, 2001
eliminated goodwill amortization, which increased earnings by $92,000, or $.04
per diluted share, for the three months ended December 31, 2001 as compared to
the same period in 2000.
14
Net Interest Income. Net interest income decreased by $328,000, or 10.0%, to
$2,960,000 for the three months ended December 31, 2001 from $3,288,000 for the
same period in 2000. The decline in net interest income reflects a reduction in
net yield on average interest-earning assets between the comparable periods. The
net yield on average interest-earning assets for the three months ended December
31, 2001 was 2.30% compared to 2.68% for the comparable period in 2000.
Provision for Loan Losses. For the three-month period ended December 31, 2001,
the provision for loan losses was $299,000 compared to $150,000 for the same
period in 2000. Management believes that, based on a detail review of the loan
portfolio, historic loan losses, current economic conditions, and other factors,
the current level of provision for loan losses, and the resulting level of the
allowance for loan losses, reflects a best estimate of probable losses inherent
in the loan portfolio.
Noninterest Income. Noninterest income increased $544,000, 161.4%, to $881,000
for the three months ended December 31, 2001 from $337,000 for the same period
in 2000. The increase in noninterest income reflects an increase in fees
collected from the origination and purchase of loans, and an increase in service
charges collected on deposit accounts during the comparable periods. In
addition, the increase reflects the accretion of income from bank owned life
insurance during the three months ended December 31, 2001.
Noninterest Expense. Noninterest expense increased $460,000, or 18.6%, to
$2,936,000 for the three months ended December 31, 2001, from $2,476,000 for the
same period in 2000. The increase in noninterest expense reflects the costs
associated with opening a new office in Sioux Falls, South Dakota, which moved
into its newly constructed facilities in April 2001. In addition, the Company
opened its third Des Moines location in November 2001. Noninterest expense also
increased as a result of the Company's on-going effort to maintain and enhance
its technology systems for the efficient delivery of products and customer
service. This includes on-line banking, which was made available to customers in
January 2002.
Income Tax Expense. Income tax expense was $169,000 for the three months ended
December 31, 2001 compared to $393,000 for the same period in 2000. The decrease
reflects the decrease in the level of taxable income between the comparable
periods.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of funds are deposits, borrowings, principal and
interest payments on loans, investments and mortgage-backed securities, and
funds provided by operations. While scheduled payments on loans, mortgage-backed
securities and short-term investments are relatively predictable sources of
funds, deposit flows and early loan repayments are greatly influenced by general
interest rates, economic conditions and competition.
The Company uses its capital resources principally to meet ongoing commitments
to fund maturing certificates of deposits and loan commitments, to maintain
liquidity, and to meet operating expenses. At December 31, 2001, the Company had
commitments to originate and purchase loans totaling $24.2 million. The Company
believes that loan repayment and other sources of funds will be adequate to meet
its foreseeable short- and long-term liquidity needs.
During July 2001, the Company's trust subsidiary, First Midwest Financial
Capital Trust I, sold $10 million in floating rate cumulative preferred
securities. Proceeds from the sale were used to purchase subordinated debentures
of First Midwest, which mature in the year 2031, and are redeemable at any time
after five years. The Company used the proceeds for general corporate purposes.
15
Regulations require First Federal and Security to maintain minimum amounts and
ratios of total risk-based capital and Tier 1 capital to risk-weighted assets,
and a leverage ratio consisting of Tier 1 capital to average assets. The
following table sets forth First Federal's and Security's actual capital and
required capital amounts and ratios at December 31, 2001 which, at that date,
exceeded the capital adequacy requirements:
Minimum Requirement
To Be Well
Minimum Requirement Capitalized Under
For Capital Adequacy Prompt Corrective
Actual Purposes Action Provisions
------ -------- -----------------
At December 31, 2001 Amount Ratio Amount Ratio Amount Ratio
- -------------------- ------ ----- ------ ----- ------ -----
(Dollars in Thousands)
Total Capital (to risk weighted assets):
First Federal $45,229 12.8% $28,230 8.0% $35,287 10.0%
Security 4,398 15.0 2,349 8.0 2,936 10.0
Tier 1 (Core) Capital (to risk weighted assets):
First Federal 41,305 11.7 14,115 4.0 21,172 6.0
Security 4,086 13.9 1,175 4.0 1,762 6.0
Tier 1 (Core) Capital (to adjusted total assets):
First Federal 41,305 8.4 19,748 4.0 24,685 5.0
Security 4,086 8.4 1,938 4.0 2,423 5.0
Tier 1 (Core) Capital (to average assets):
First Federal 41,305 8.4 19,736 4.0 24,670 5.0
The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA)
established five regulatory capital categories and authorized the banking
regulators to take prompt corrective action with respect to institutions in an
undercapitalized category. At December 31, 2001, First Federal and Security
exceeded minimum requirements for the well-capitalized category.
Forward-Looking Statements
The Company, and its wholly-owned subsidiaries, First Federal and Security, may
from time to time make written or oral "forward-looking statements," including
statements contained in its filings with the Securities and Exchange Commission,
in its reports to shareholders, and in other communications by the Company,
which are made in good faith by the Company pursuant to the "safe harbor"
provisions of the Private Securities Litigation Reform Act of 1995.
These forward-looking statements include statements with respect to the
Company's beliefs, expectations, estimates, and intentions, that are subject to
significant risks and uncertainties, and are subject to change based on various
factors, some of which are beyond the Company's control. Such statements address
the following subjects: future operating results; customer growth and retention;
loan and other product demand; earnings growth and expectations; new products
and services; credit quality and adequacy of reserves; technology; and our
employees. The following factors, among others, could cause the Company's
financial performance to differ materially from the expectations, estimates, and
intentions expressed in such forward-looking statements: the strength of the
United States economy in general and the strength of the local economies in
which the Company conducts operations; the effects of, and changes in, trade,
monetary, and fiscal policies and laws, including interest rate policies of the
Federal Reserve Board; inflation, interest rate, market, and monetary
fluctuations; the timely development of and acceptance of new products and
services of the Company and the perceived overall value of these products and
services by users; the impact of changes in financial services' laws and
regulations;
16
technological changes; acquisitions; changes in consumer spending and saving
habits; and the success of the Company at managing the risks involved in the
foregoing.
The foregoing list of factors is not exclusive. Additional discussion of factors
affecting the Company's business and prospects is contained in the Company's
periodic filings with the SEC. The Company does not undertake, and expressly
disclaims any intent or obligation, to update any forward-looking statement,
whether written or oral, that may be made from time to time by or on behalf of
the Company.
17
Part I. Financial Information
Item 3. Quantitative and Qualitative Disclosure About Market Risk
Market Risk
The Company is exposed to the impact of interest rate changes and changes in the
market value of its investments.
The Company currently focuses lending efforts toward originating and purchasing
competitively priced adjustable-rate loan products and fixed-rate loan products
with relatively short terms to maturity. This allows the Company to maintain a
portfolio of loans that will be sensitive to changes in the level of interest
rates while providing a reasonable spread to the cost of liabilities used to
fund the loans.
The Company's primary objective for its investment portfolio is to provide the
liquidity necessary to meet loan funding needs. This portfolio is used in the
ongoing management of changes to the Company's asset/liability mix, while
contributing to profitability through earnings flow. The investment policy
generally calls for funds to be invested among various categories of security
types and maturities based upon the Company's need for liquidity, desire to
achieve a proper balance between minimizing risk while maximizing yield, the
need to provide collateral for borrowings, and to fulfill the Company's
asset/liability management goals.
The Company's cost of funds responds to changes in interest rates due to the
relatively short-term nature of its deposit portfolio. Consequently, the results
of operations are generally influenced by the level of short-term interest
rates. The Company offers a range of maturities on its deposit products at
competitive rates and monitors the maturities on an ongoing basis.
The Company emphasizes and promotes its savings, money market, demand and NOW
accounts and, subject to market conditions, certificates of deposit with
maturities of six months through five years, principally from its primary market
area. The savings and NOW accounts tend to be less susceptible to rapid changes
in interest rates.
In managing its asset/liability mix, the Company, at times, depending on the
relationship between long- and short-term interest rates, market conditions and
consumer preference, may place somewhat greater emphasis on maximizing its net
interest margin than on strictly matching the interest rate sensitivity of its
assets and liabilities. Management believes that the increased net income which
may result from an acceptable mismatch in the actual maturity or repricing of
its asset and liability portfolios can, during periods of declining or stable
interest rates, provide sufficient returns to justify the increased exposure to
sudden and unexpected increases in interest rates which may result from such a
mismatch. The Company has established limits, which may change from time to
time, on the level of acceptable interest rate risk. There can be no assurance,
however, that in the event of an adverse change in interest rates the Company's
efforts to limit interest rate risk will be successful.
Net Portfolio Value The Company uses a Net Portfolio Value ("NPV") approach to
the quantification of interest rate risk. This approach calculates the
difference between the present value of expected cash flows from assets and the
present value of expected cash flows from liabilities, as well as cash flows
from off-balance-sheet contracts. Management of the Company's assets and
liabilities is performed within the context of the marketplace, but also within
limits established by the Board of Directors on the amount of change in NPV that
is acceptable given certain interest rate changes.
18
Presented below, as of December 31, 2001 and September 30, 2001, is an analysis
of the Company's interest rate risk as measured by changes in NPV for an
instantaneous and sustained parallel shift in the yield curve, in 100 basis
point increments, up and down 200 basis points. As illustrated in the table, the
Company's NPV at December 31, 2001 is somewhat more sensitive to increasing rate
changes than declining rates. This occurs primarily because, as rates rise, the
market value of the Company's fixed-rate loans and mortgage-backed securities
declines due both to the interest rate increase and the related slowing of
prepayments. When rates decline, the Company does not experience a significant
rise in market value for these loans and mortgage-backed securities because
borrowers prepay at relatively higher rates. The value of the Company's deposits
and borrowings change in approximately the same proportion in rising and falling
interest rate scenarios. At September 30, 2001, the Company's NPV was more
sensitive to deelining interest rates than to increasing interest rate
At December 31, 2001 At September 30, 2001
-------------------- ---------------------
Change in Interest Rates Board Limit
(Basis Points) % Change $ Change % Change $ Change % Change
-------------- -------- -------- -------- -------- --------
(Dollars in Thousands)
+200 bp (40)% $ (6,294) (15)% $ (2,472) ( 6)%
+100 bp (25) (2,623) ( 6) (698) ( 2)
0 bp -- -- -- -- --
-100 bp (10) (1,191) ( 3) (4,336) (11)
-200 bp (15) (5,715) (14) (11,377) (29)
Certain shortcomings are inherent in the method of analysis presented in the
foregoing table. For example, although certain assets and liabilities may have
similar maturities or periods to repricing, they may react in different degrees
to changes in market interest rates. Also, the interest rates on certain types
of assets and liabilities may fluctuate in advance of changes in market interest
rates, while interest rates on other types may lag behind changes in market
rates. Additionally, certain assets such as adjustable-rate mortgage loans, have
features which restrict changes in interest rates on a short-term basis and over
the life of the asset. Further, in the event of a change in interest rates,
prepayments and early withdrawal levels would likely deviate from those assumed
in calculating the tables. Finally, the ability of some borrowers to service
their debt may decrease in the event of an interest rate increase. The Company
considers all of these factors in monitoring its exposure to interest rate risk.
19
FIRST MIDWEST FINANCIAL, INC.
PART II - OTHER INFORMATION
FORM 10-Q
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits: None
(b) Reports on Form 8-K: None
All other items have been omitted as not required or not applicable under the
instructions.
20
FIRST MIDWEST FINANCIAL, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIRST MIDWEST FINANCIAL, INC.
Date: February 14, 2002 By: /s/ James S. Haahr
----------------- ------------------------------------------
James S. Haahr, Chairman of the Board,
President and Chief Executive Officer
Date: February 14, 2002 By: /s/ Donald J. Winchell
----------------- ------------------------------------------
Donald J. Winchell, Senior Vice President,
Treasurer and Chief Financial Officer